The Bank of England is determined to delay the sale of billions of pounds of government bonds in a bid to foster greater stability in gilt markets following the failure of the UK’s “mini” budget.
The BoE had already delayed the start from its sale of £838 billion bought under its quantitative easing program from October 6 to the end of this month. It is now expected to bow to investor pressure for a further pause until the market calms down.
The Financial Times has learned that senior Bank officials have come to this view after finding the gilt market “badly hit” in recent weeks, a view backed by its Financial Policy Committee.
Investors also warned that the central bank’s plans to start selling bonds in its portfolio later this month could destabilize markets.
The Bank of England said on Tuesday that it had not yet made a decision on any delay in the bond sale.
Despite 30-year gilt yields have fallen from their recent high of more than 5 percent to 4.45 percent on Tuesday, they remain well above the pre-tax level of 3.75 percent.
“I’m not sure it’s wise for them to go right away because the market is very fragile right now,” said Jim Leaviss, chief investment officer of government bonds at M&G Investments.
Sandra Holdsworth, UK head of rates at Aegon Asset Management, said: “When they’ve had to support the market so recently, I’m not sure they can go ahead without risking more trouble.”
The BoE change is set to put the start of the UK QE reversal on hold: a process that other central banks have initiated in order to reduce bloated balance sheets and increase your leeway in any future currency or financial crisis.
BoE officials maintain that inflation control can be implemented by changing interest rates, rather than so-called quantitative tightening, the opposite of QE. At the pace the bank has set, completing QT would take a decade or more.
In Washington on Saturday, BoE Governor Andrew Bailey confirmed that the MPC would seek to use bank rates rather than asset sales as its main weapon in the fight against inflation.
“The MPC is not using the stock of asset holdings as an active monetary policy tool at present,” he told an audience of central bankers. “The intention was to unwind the stock of QE in a gradual and predictable manner, and in a way that was not tied to underlying economic conditions,” he added.
Delaying the bond sale would not need a vote from the bank’s Monetary Policy Committee. In making its previous deferral last month, the bank deemed turbulent market conditions to meet the “high end” it had set to alter timing without a vote.
The BoE still expects to unwind £80bn of assets in the first year of its balance sheet liquidation through a combination of asset expirations and active sales.
The Bank is likely to stick to its policy of allowing maturing bonds to mature without reinvesting their earnings in other securities. But active selling could spark more market turbulence, hurting the economy and complicating plans to raise interest rates, ING rates strategist Antoine Bouvet said.
“He doesn’t want to let anything kill his chances of raising rates even higher, which is his only proven tool to reduce inflation,” Bouvet said. “I’m not sure this market can also accommodate BoE selling.”
Some analysts argue that the BoE may need to modify its plans when it decides to start quantitative tightening.
Instead of selling roughly equal amounts of short, medium and long gilts, the central bank should focus on short maturities, said Daniela Russell, head of UK rates strategy at HSBC. That would allow the long end of the gilt market, which was the focus of the chaotic sale that triggered a liquidity crisis in the pension funds, to “continue to recover,” he added.